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The Perils of Fixed Term Contracts (Part II)

In my blog post from March 31, 2015, I discussed some common mistakes made by employers with fixed term contracts. An April, 2016 decision from the Ontario Court of Appeal is a perfect demonstration of how costly it can be to not include a proper termination provision in a fixed term contract.

In Howard v. Benson Group Inc., an employee signed a five-year fixed term contract with an annual salary of $60,000. However, he was terminated, without cause, after only 23 months. The employer provided only two weeks’ pay in lieu of notice in accordance with the termination provision in the employment contract, which read:

Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.

The employee commenced a wrongful dismissal claim and sought damages equalling the unexpired portion of his contract (i.e. 37 months). The motions judge granted summary judgment, holding that the termination provision was invalid due to ambiguity as it did not explicitly set out the employee’s right to benefit continuation during the notice period. However, the employee did not receive the remedy that he was seeking. Instead, the employee was awarded common law damages for wrongful dismissal. The quantum of damages, subject to mitigation, was to be assessed at a mini trial.

The employee appealed the finding that he was entitled to only common law reasonable notice and the Court of Appeal overturned the decision of the motions judge. The Court of Appeal held that a fixed term contract, without an enforceable termination provision, clearly establishes a notice period equal to the unexpired portion of the contract and “ousts the common law presumption of reasonable notice”.

The Court of Appeal went on to hold that there was no duty to mitigate – the employee was entitled to the unexpired portion of the contract, even if he found new employment the very next day. Here, the Court of Appeal was relying on the principle that where a contract specifies damages for early termination without specifying the need for mitigation, the employee is entitled to those damages, full stop. In these circumstances, a fixed term contract, without a termination provision, specifies damages for early termination (i.e. the unexpired portion of the contract) without the need for mitigation.

The end result was that a termination that the employer believed was going to cost $2,300 (two weeks’ salary) ended up costing $185,000 (37 months’ salary), not to mention the legal fees involved in defending the wrongful dismissal claim.

We encourage businesses to review the termination provisions in their fixed term contracts. Please contact us if we can be of assistance.

This update is provided as a courtesy for your general information and does not constitute legal advice. Every organization is unique and may also be subject to other laws not contemplated in this update. This update should not be relied on as a substitute for legal advice which necessarily must be specific to your organization, your objects, your operations, and your structure. If you have any questions about this information please contact one of the lawyers listed above.